Star Potential?

It’s a win-win situation, with Jetstar reaping significant passenger feed from Emirates. That partnership allowed Emirates, which operated six Boeing 777 flights and one Airbus A380 service daily into Singapore, to up-gauge one of the 777 services to another A380 flight in March, bringing its capacity to nearly 42,000 seats a week, compared to Cathay’s 39,000, representing a 12 per cent increase over its capacity last year and a 29 per cent lift over March 2014.

Jetstar Asia and Emirates may appear to be strange bedfellows but it merely scratches the surface.

Jetstar Asia and Emirates may appear to be strange bedfellows but it merely scratches the surface. Unlike any other LCC, Jetstar has made forging linkages with full-service operators a key plank in its strategy and a means of protecting it from the strain of fierce competition and overcapacity within the region’s budget market. It now has 40 interline partners, ranging from Emirates to American Airlines, British Airways, Japan Airlines, Qatar Airways, China Southern Airlines, China Eastern Airlines, Air France and a host of others.

As recently as December another significant step was taken towards embedding the group in what amounts to access to a truly global network when Jetstar Asia, Jetstar Japan and Jetstar Pacific all added their networks to Global Explorer, the round-the-world fare offered by Oneworld alliance member carriers and other selected partners outside the alliance.

As Jetstar group executive manager for network and partnerships Alan McIntyre put it: “This partnership with oneworld Global Explorer further symbolises our commitment to all customers, providing yet another platform for them to tap into Jetstar’s wide network of destinations. Through this collaboration, we are effectively introducing to passengers across the globe the wonders of South-East Asia and North Asia destinations offered by the network of Jetstar Asia, Jetstar Japan and Jetstar Pacific. ” All in all, the clouds have cleared over Jetstar’s Asian operations over the past 18 months, since in 2014 the Jetstar group lost $116 million, $36 million of that in Singapore. Jetstar Asia chief executive Barathan Pasupathi described it as probably the most difficult year in its 11-year history. At the time, Jetstar Pacific in Vietnam was still in the red and Jetstar Japan, launched in July 2012, hadn’t yet moved into the black, understandable given start-up costs and the difficulties of starting up in an unproven budget market.

That the sun has begun to shine became clear last August when Qantas announced its own remarkable turnaround from record $2. 8 billion losses to an after-tax profit of $557 million in the year ended June 30 2015. Underlying profit before tax was $975 million, a $1. 6 billion improvement on the previous year. Just as importantly, during the period the Jetstar Group reported record pre-tax profits of $230 million, with Jetstar International achieving a record profit as it introduced more 787-8s into its fleet. Both Jetstar Asia and Jetstar Pacific were profitable in the second half and Jetstar Japan “significantly improved” its performance on the previous year, even though Qantas and its fellow shareholder Japan Airlines had to commit an equity injection of up to $55 million each to support the carrier as it continued to expand its international operations and maintain its leading position in the growing and competitive Japanese domestic market. Then, in February this year, Qantas announced its three Asian LCCs were collectively profitable in the first half, compared to the previous year, even though Indonesian volcano eruptions had a $23 million adverse impact.

However, making money doesn’t mean market conditions have eased. Asia remains a cut-throat budget market, still suffering from overcapacity and intense competition among the likes of AirAsia, Tiger Airways, Lion Air, Cebu Pacific, emerging Vietnamese and Chinese LCCs and some 40 or more other budgeteers. A virtual freeze on expansion and fleet growth by Jetstar Asia, imposed in early 2014, remains in place. A recent CAPA – Centre for Aviation report said Jetstar Asia is looking for opportunities to further boost yields and expand its network while continuing to refrain from fleet growth. It has 18 A320s.

“But the carrier has been able to grow ASKs by improving utilisation, enabling it to add capacity in markets that have strong feed from interline or codeshare partners,” explained CAPA. “Unit revenues have been on the rise over the last several months and Jetstar Asia could see further yield improvements as it adds more new partners and expands existing partnerships. ”

It did add three new secondary regional routes late last year, Palembang and Pekanbaru in Indonesia along with Da Nang in Vietnam. None of these are served by other LCCs and the move was aimed at further reducing its reliance on markets that are still suffering from overcapacity and irrational competition.

“Jetstar Asia is also adding capacity on some existing routes, including to Jakarta, Phnom Penh and Siem Reap. But the capacity expansion is relatively modest and will be achieved by using its existing fleet,” explained CAPA.

Experimenting with new secondary routes is a sensible strategy.

It is in this landscape that the partnerships with global legacy carriers has become vital. CAPA says Jetstar Asia will certainly be impacted if irrational competition returns to Singapore’s short-haul LCC sector, but its higher reliance on connecting traffic and the pursuit of new unique routes should help insulate the blow. “Jetstar Asia is trying to stay away from the main competition by expanding partnership traffic. Jetstar Asia has carved out a growing and profitable niche providing regional connections to full service airlines serving Singapore. It has significantly expanded its partnership portfolio over the last year, driving more connecting traffic. This has been a key driver in its improvement in unit revenues and overall turnaround in FY2015 as the seats sold by its full service partners generally come with a significant yield premium compared to point-to-point traffic sold through the Jetstar website and other distribution channels,” added CAPA.

The consultancy also pointed out that despite the potential challenges, experimenting with new secondary routes is a sensible strategy for Jetstar Asia, which has the partnerships in place to potentially make routes work where other LCCs that relied entirely on point-to-point traffic have previously failed. The risk associated with short-haul routes is relatively small, particularly when incentives are being offered, but the rewards potentially could be large.

“Jetstar Asia is a pioneer in many respects as one of the first Asian LCCs – if not the first – to pursue partnerships and transit traffic. It has by far the largest portfolio of interline partners among LCCs in Asia and one of the largest in the global LCC sector. Jetstar Asia almost certainly also now has the highest portion of connection traffic among Asia’s short-haul LCCs.

“The connecting traffic from full-service partners is an important differentiator for Jetstar Asia in the extremely competitive Asian LCC marketplace. It has enabled Jetstar Asia to return to the black and will play a key role in further boosting profitability and unlocking potential long-term growth. ” While its fleet may be, for the moment, frozen in time, Jetstar Asia hasn’t been napping on other fronts. Indeed, it has become increasingly evident that the term “budget” doesn’t mean customers are treated any differently from their higher paying counterparts at legacy airlines. Jetstar has responded to the unprecedented competition with a “customer-centric” overhaul of its business model. Chief executive Pasupathi, in a keynote address to a recent Future Travel Experience’s Asia conference in Singapore, said that while the region’s travel boom has driven legacy carriers to boost service levels, low-cost carriers have been even more affected.

“It used to be enough for low-cost carriers to offer the lowest fare, but in the past decade, we have seen that passengers don’t just want the lowest fare. So, the customer has become the heart of our business. ” He argued that culture, connected travellers and digital disruption have played a significant role in revving up competition for low-cost carriers in Asia and abroad. “The more connected travellers are, the more they expect the journey to be simplified through technology,” Pasupathi explained. “We conducted a survey and found that 78 per cent of our passengers said they hate queuing. When they queue, 85 per cent are on mobile. ” The result led Jetstar Asia to roll out a series of mobile-focused initiatives including a new mobile check-in and self-service baggage drop program, “Straight to the Gate”.

The airline also did a rethink of its digital platforms, including its website. “The typical layout of booking engine architecture is very linear. Low-cost carriers typically unbundle the travel experience and then bundle it up again. But we are now changing the whole experience and moving toward what Amazon, Google, eBay and others have done. ” The airline’s booking process has now been simplified from six to three steps, and the new architecture has allowed for better data mining and tracking. Among some of the key discoveries the airline has found from improved website analytics is a growing customer base of business travellers. According to research from McKinsey, 41 per cent of business travellers are flying low-cost carriers in Singapore. “The customers are looking for another variant of business travel. ” While Jetstar Asia may have fleet growth on hold, the same does not apply in Vietnam or Japan.

Late last year, after a meeting with Qantas chief executive Alan Joyce and Jetstar Group chief executive Jayne Hrdlicka in Sydney, Vietnam Airlines (it holds a 70 per cent stake in Jetstar Pacific) chief executive Dr Pham Ngoc Minh said he was optimistic about the future of the LCC.

“Jetstar Pacific has made significant progress in recent years, culminating in the low fares airline being profitable for the first nine months of calendar year 2015. With the increased demand for low fare travel in Vietnam, we expect to grow Jetstar Pacific to a fleet of up to 30 aircraft by 2020. ” That would actually make it the largest in the group ahead of Jetstar Asia with its 18 aircraft and Jetstar Japan with 20, although Qantas has pointed to the potential to have 50 aircraft at its Japanese arm over the longer term. Vietnam Airlines and Jetstar Pacific hold a combined marketshare of 70 per cent in the fast-growing Vietnamese aviation market, but they also face the threat of increased competition from a rapidly growing privately-owned LCC, Vietjet.

In March, CAPA reported Jetstar Pacific plans more international routes this year to compete head-on with Vietjet. The centre said the airline’s international routes are now more profitable, although strategically it will likely need to add capacity on some existing domestic routes as competition with VietJet continues to intensify.

Jetstar Pacific’s passenger traffic grew by 38 per cent in 2015, to 3. 6 million. VietJet recorded 70 per cent passenger growth last year, to around 10 million, and expects 50 per cent growth to approximately 15 million this year.

“The international expansion plan for 2016 includes more charter contracts, along with more scheduled routes. The charters are crucial for Jetstar Pacific to maintain its newfound profitability, given the intense domestic competition,” said the CAPA report, adding the carrier will continue to focus on charters with new services from several Vietnamese gateways, including secondary cities, to several Chinese destinations. Jetstar Pacific is now considering scheduled services from Danang to Hong Kong, it added. The airline is also currently evaluating potential new destinations in both South-East and North Asia. Japan is the most likely new destination for Jetstar Pacific as the Vietnam-Japan tourism market grows and it has also been evaluating Bali, a destination not currently served non-stop from Vietnam but with strong potential.

There is no doubt both Qantas and Vietnam Airlines are fully committed to their Vietnamese LCC. As Hrdlicka has said: “Qantas has successfully implemented a dual-brand strategy in Australia with Jetstar and we are sharing this experience with Vietnam Airlines to do the same with Jetstar Pacific. We expect to continue to leverage the strengths of Vietnam Airlines, Jetstar and Qantas. This includes Jetstar Pacific accessing the benefits of the Qantas aircraft fleet order with Airbus. ” Qantas has 99 next generation A320neo aircraft on order with Airbus for delivery from 2017. It is also understood that Pacific has been looking at the potential to expand the fleet with regional options such as Bombardier’s CSeries or Embraer’s E-Jet E2.

In Japan, still an embryonic market for LCCs, the Jetstar operation appears to have climbed over the hump and has emerged as the most successful of the new breed of budget carriers there. Launched a little over three years ago with domestic flights from Tokyo’s Narita airport, it now has almost 60 per cent of Japan’s low-cost market, although it should be pointed out that LCCs still account for only seven per cent of the country’s domestic traffic, compared to a global average of around 22 per cent. It hasn’t added to its 20-strong fleet of A320s for more than a year but the company thinks there is plenty of growth to come with traffic in the LCC sector rising faster than the rest of Japan’s air travel market.

“The growth prospects ahead of us are enormous,” said Jetstar Japan’s chairman Masaru Kataoka in February. “There is every chance Jetstar Japan will end up being an even larger airline with more than twice or three times the operation size of our current operations. ” The carrier launched its first international route, from Narita to Hong Kong, in June last year, adding Taipei in December and, in March this year, Manila. Like other LCCs, however, it does face tough competition. On the Tokyo-Hong Kong route, for example, it has to compete with Cathay Pacific (25 weekly flights), All Nippon Airways (14), Vanilla Air (All Nippon Airways’ wholly-owned LCC with 14 daily flights), HK Express (seven) and Japan Airlines (seven). To Taipei’s Taoyuan airport the competition includes China Airlines (three daily flights), EVA Air, Japan Airlines and TransAsia Airways (each with double-daily flights), as well as All Nippon Airways, Scoot and Tigerair Taiwan, each operating daily flights.

It hasn’t put Jetstar Japan off. In December it added two more routes to Taiwan, from Osaka to Taipei and Nagoya to Taipei. Competition on the Osaka-Taipei route is even tougher with China Airlines operating 22 weekly flights, EVA Air 22, Peach Aviation two, Japan Airlines 14, TransAsia Airways 14, Jetstar Asia 12, Tigerair Taiwan seven and Cathay Pacific seven all operating the same city pair.

But then competition – and growing competition – are no strangers to any LCC now operating across Asia’s budget market. They don’t only compete with other no-frills operators but with full-service legacy carriers. Which is why Jetstar’s innovative use of partnerships, which would normally be classified as ‘sleeping with the enemy’, appears to be giving it a critical edge in the battle to survive, grow and be sustainably profitable.